1. Define Auditing. Explain its objects and advantages.

The origin of auditing may be traced back to the 18th century when the practice of large-
scale production was developed as a result of Industrial Revolution. It is found that some systems
of checks and counterchecks were applied for the purpose of maintaining public accounts, rather
accounts of public institutions, as early as the days of the ancient Egyptians, the Greeks and the
Romans.
The word 'audit' is derived from the Latin word, audire, which means to hear'. Originally,
it was customary for persons responsible for maintenance of accounts to go to some impartial
and experienced persons, ordinarily judges, who used to hear these accounts and express their
opinion about their correctness or otherwise. Such persons were known as auditors'. Thus, the
term 'auditor' means literally 'hearer', i.e., 'one who hears' and is used ever since the days when
public accounts were accepted and approved on the basis of hearing the accounts read.
The last decade of the 15th century was an important period during which a great impetus
was given to trade and commerce by the Renaissance in Italy and the principles of double-entry
book-keeping were evolved and published in 1494 at Venice (in Italy) by Luca Paciolo. This
system of accounts was quite capable of recording all kinds of mercantile transactions. Thus, the
scope of audit automatically increased thereafter. Luca Paciolo also defined and described the
duties and responsibilities of an auditor and since then, there have been various changes in the
scope and definition of audit, and subsequently, the duties and responsibilities of an auditor have
enormously increased.
The Industrial Revolution of England was another landmark in the history of trade and
commerce. This led to a great increase in the volume of trading operations which necessitated the
use of more capital and the average trader was compelled to combine in partnership with others.
Consequently, big enterprises in the form of partnership firms and joint stock companies were
formed. The growth of business enterprises before and after the Revolution was accompanied by
improved accounting system. Besides this, the separation of ownership from management in

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British Companies made stock-holders realize that their interests could be well-protected by an
independent and impartial audit.
Such developments had a direct effect on the evolution of the practice of auditing, but the
audit of business accounts could not be common until the 19th century. The enormous increase
in the trade, commercial and industrial activities further necessitated the use of proper devices of
checking the accounts of big business-houses. Under these conditions, the commercial public
became perfectly aware of the advantages of the services of auditors and the importance of audit
increased to such an extent in those days that the accounts were thought to be misleading and
incorrect unless they were audited by professional and qualified auditors.
The Institute of Chartered Accountants in England and Wales was incorporated by Royal
Charter on May 11, 1880 with the sole purpose of preparing auditors. Usually, auditors in India
were also prepared by this Institute. In January 1923, the British Association of Accountants and
Auditors was established and a person after passing his examination from this Association could
be fully competent to work as professional auditor in India.

Auditing in India
From 1914 to 1932. The history of auditing in India dates back to April 1, 1914 when the
Indian Companies Act, 1913 came into force. The growth of the accountancy profession in this
country was actually an outcome of this Act, which made it obligatory on the part of every
company registered under it to have the accounts audited at least once every year. The Act for
the first time prescribed the qualifications for an auditor.
Initially, the Government of Bombay was first to arrange for conducting the courses of
study in this direction. The qualification of being an auditor was obtained by passing the
examination of the Government Diploma in Accountancy (G.D.A) conducted by the Bombay
Government.
From 1932 to 1949. Till 1932, it was the concern of the Provincial (now State}
Governments to arrange for the education of and to prepare qualified auditors. Thereafter, the
Central Government established an Indian Accountancy Board under the Auditors' Certificate
Rules, 1932. Under these Rules, Registered Accountants (R.A.) were prepared to work as
qualified auditors.

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 From 1949 to 1956. The Chartered Accountants Act was passed in 1949 and it came into
force on July 1, 1949. On the passing of this Act, the autonomy was granted to the accountancy
profession and as a result, the regulation, control and management of the profession passed from
the Central Government to the Profession, i.e., in the hands of the Indian Institute of Chartered
Accountants which was formed under the provisions of the said Act. Now, a person has to pass
the examinations conducted by it. Only then he can obtain his certificate of Chartered
Accountants (C.A.).

DEFINITION OF AUDITING
The word 'audit' has a wide usage and it now means a thorough scrutiny of the books of
accounts and its ultimate aim is to verify the financial position disclosed by the Balance Sheet
and the Profit and Loss Account of a Company. The following are some of the definitions of
audit:
(i) Spicer and Pegler: "An audit may be said to be such an examination f the books,
accounts and vouchers of a business as will enable the auditor ) satisfy that the Balance Sheet
is properly drawn up, so as to give a true and fair view of the state of affairs of the business
and whether the Profit and Loss Account gives a true and fair view of the profit or loss for the
financial period according to the best of his information and the explanations given to him and
as shown by the books, and if not, in what respects he is not satisfied."
(2) F.R.M. De Paula : "An audit denotes the examination of a Balance Sheet and Profit
and Loss Account prepared by others together with the rooks, accounts and vouchers relating
thereto in such a manner that the auditor may be able to satisfy himself and honestly report that,
in his union, such Balance Sheet is properly drawn up so as to exhibit a true and correct view of
the state of affairs of a particular concern according to :he information and explanations given to
him and as shown by the books."
(3) R.B. Bose: "Audit may be said to be the verification of the accuracy and correctness
of the books of accounts by an independent person qualified for the job and not in any way
connected with the preparation of such accounts."
Thus, audit is the systematic and scientific examination of the accounts of a business. The
fundamental question is how an auditor should perform this scrutiny to his satisfaction and
according to the wishes and instructions of his client. For this, the following definition gives a
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clue:

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 (4) M.L. Shandilya: "Auditing maybe defined as inspecting, comparing, checking,
reviewing, vouching, ascertaining, scrutinizing, examining and verifying the books of accounts
of a business concern with a view to have a correct and true idea of its financial state of affairs."
Briefly speaking, an audit is an intelligent and critical examination of the accounts of a
business as is evident from the various definitions given above, but progressive writers, like Sri
A.K. Chanda, former Comptroller and Auditor-General of India, have now gone still further in
expressing their point of view on audit.
(5) A.K. Chanda: "Audit is not an inquisition and its mission is not one of fault-finding.
Its purpose is to bring to the notice of the administration lacunae in the rules, regulations and
lapses, and to suggest possible ways and means for the execution of plans and projects with
greater expedition, efficiency and economy."

Objects of an Audit
The main object of audit is to verify the accounts and to report whether the Balance Sheet
and the Profit and Loss Account have been drawn properly according to the Companies Act and
whether they exhibit a true and fair view of the state of affairs of the concern. Such verification
of accounts and reporting to management are vital factors for promoting efficiency and accuracy
in the maintenance of accounts so that the owners of a business may get accurate information
about the financial condition of their business. The verification of accounts is done to see if they
are correct, complete and in conformity with the Law. For this, an auditor has to discover errors
and fraud.
As such, the subsidiary objects of audit are:
1. Detection of errors and fraud, and
2. Prevention of the recurrence of those errors and of fraud.
 Error: Error of Omission, Commission, Compensating Errors, Principles
 Fraud: Misappropriation of Cash and Goods

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ADVANTAGES OF AUDIT

It is no more controversial that accounting is a necessity while auditing is a luxury.

People now get their accounts audited by a qualified auditor so that they may be sure of the
smooth running of their business and validity of the investment that they have made therein.

The advantages of audit can be grouped into the following categories:

For Business itself
1. The accounts of a business and its financial position can be examined by an independent
and qualified auditor.
2. Errors and fraud are located very easily at an early date and chances of their further
occurrence are reduced to the minimum.
3. The auditing of accounts makes the clerks who maintain them alert, careful and vigilant,
and more so, they prepare accounts very carefully in future and keep them up-to-date.
4. Money can easily be borrowed from banks and other money-lenders on the basis of
properly audited accounts.
5. The business itself enjoys better reputation if its accounts are audited by an independent
auditor.
6. The auditor, if he audits a business regularly, can come into a close touch with the
working of that business and hence, can give concrete suggestions to improve it if he is
asked to do so.
7. Audit is useful in case business is managed by some agent or representative of its owner.

For the Owners of a Business

8. If the business is owned by a sole trader, he can rely well on the audited accounts and on
his accounts clerks who are responsible for the maintenance of accounts.
9. If the business is organized as a partnership firm, its partners can utilize the audited
accounts to settle their disputes in regard to adjustment of capital and valuation of
goodwill at the time of admission, retirement and death of a partner.

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10. If the business is constituted as a joint-stock company, its shareholders who reside at
places distant from the head office of the company can rely on audited accounts and can
be sure of their investment being safe with the company.

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 11. If it is a trust, its trustees can easily make their position clear before others by
getting the accounts audited by an outside and impartial auditor.
For Others
12. The audited accounts of previous year are helpful in the settlement of claims by
the insurance company in case of fire.
13. The banks or investors or other money-lenders can take decisions for granting
loans to business houses on the basis of their properly audited accounts.
14. The purchaser of a business can easily calculate the amount of purchase
consideration on the basis of its audited accounts.
15. The taxation authorities can very well rely on the audited accounts for the
purpose of imposing Sales-tax, Income-tax, Wealth-tax, Expenditure-tax, etc.
16. The audited accounts of a business can be produced in support of a legal case
before the Court. It forms a basis to determine action in bankruptcy and
insolvency cases.
17. In the case of employer-employee disputes, audited accounts are helpful in the
determination of profits and trends of profitability. Trade union disputes can be
easily settled on the basis of audited accounts of a concern.